Pay Freezes Are Melting

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If your employees’ salaries are still frozen or reduced from where they were in the premeltdown days, your company is behind the times.

A noticeable thawing is in progress, according to new research from Towers Watson. Among 381 U.S. organizations that were surveyed, only 9% have frozen salaries for management, professional/technical, and administrative employee groups in 2011. That compares with 17% to 20% in 2010.

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For executives, salary budgets are frozen at 13% of survey participants, less than half as many as last year. Even hourly workers are doing better, with 12% of the organizations freezing their pay, compared with 20% in 2010.

Not only are salary freezes melting, but merit raises are making a comeback. On average those polled have budgeted 3% base salary hikes for every employee category, the most in three years.

The motivation for the strategy shifts is not so much employee retention as employee recruiting, says Laury Sejen, global practice leader, rewards, for Towers Watson. In 2008 and 2009, few companies had trouble attracting any type of employee. Now 54% report issues with finding enough people with critical skills, and 37% are encountering the same with finding both high performers and those with high potential. “There’s a sense now that you have to be broadly competitive on base salary levels because the market has started to move again,” says Sejen.

Tampa-based LazyDays, the world’s largest recreational-vehicle dealership, reduced salaries by 5% across the board during the recession. But at least the company had no headaches about potentially losing key employees, says CFO Randy Lay. For one thing, Florida’s unemployment rate is three percentage points above the national average. But more significant was the fact that the entire RV industry, like many that target high-end customers, was severely depressed.

“The only places an RV technician or salesperson can go are to the auto industry — and you know what was going on there — or to another RV dealer,” says Lay. Some people did go looking down the street, he adds, but they found no jobs available. Still, by late 2010 business had recovered enough that LazyDays restored full salaries to employees.

When it comes to unfrozen salaries, they’re not all created equal. After holding the line on pay in 2009, environmental-cleanup firm WRScompass awarded a token 1.5% bonus to selected employees last year, and has a similar plan for this year. But, says CFO Richard Kelecy, workers have taken the low pay growth in stride compared with their reaction to the company’s suspension of its 401(k) matching funds. “That they were not happy about,” he says. With the pay, “we did not take anything away, and they understand where the economy is.” The loss of retirement income was a bigger blow because, at the time the 401(k) match was suspended in 2009, most 401(k) plans already had lost about half their value.

Meanwhile, Sejen of Towers Watson is guardedly optimistic that the good news will keep on rolling. While acknowledging that the unrest in the Middle East muddles the near-term economic picture, she nonetheless says, “Barring something fairly dramatic, I think these [improved] numbers are going to hold.”